Cause Mr. Charlie Told Me So

Published On: April 23, 2020

Written by: Ben Atwater and Matt Malick

“All of humanity’s problems stem from man’s inability to sit quietly in a room alone.” – Scientist and Philosopher Blaise Pascal, 1654

If we thought markets were unpredictable before 2020, we feel confidently reassured now.  This roller coaster ride is without precedent.  Almost every day is a new surprise.  The rapidity of the stock market drop was jaw dropping.  Its recent rally is equally so. 

Is the coronavirus infection curve really flattening?  If so, can it remain flattened as we “reopen”? When will the economy bottom?  And, then when will it improve?  Will coronavirus create lasting behavioral and, therefore, economic changes?  Will an effective treatment or a vaccine legitimately emerge for COVID-19 and when?  Will there be a second wave of infections?  Has historic monetary and fiscal action by the Federal Reserve and Congress been enough to cushion economic hardship? 

If we knew the answer to any of these questions, would it even matter for markets?  Would we be in any better position to predict markets?  Probably not. 

Charlie Munger, the Vice Chairman of Berkshire Hathaway, drove home this very point – nobody knows –   in an interview last week with The Wall Street Journal.  Asked about what Berkshire is doing with its own investments he said,

“Well, I would say basically we’re like the captain of a ship when the worst typhoon that’s ever happened comes . . . We just want to get through the typhoon . . .  (W)e will be fairly conservative . . . And we’ll emerge on the other side very strong.”

Speaking more generally about our current crisis and answering the clichéd question of whether we are facing another Great Depression, Munger responded,

“Of course, we’re having a recession . . . The only question is how big it’s going to be and how long it’s going to last.  I think we do know that this will pass.  But how much damage, and how much recession, and how long it will last, nobody knows . . . I don’t think we’ll have a long-lasting Great Depression.  I think the government will be so active that we won’t have one like that.  But we may have a different kind of mess.”

Not only does Warren Buffett and Charlie Munger’s Berkshire Hathaway own a vast portfolio of publicly traded stocks, but they own an even greater portfolio of operating companies.  Asked about the future of these businesses, Munger said something unexpected, which goes to the novelty of this crisis: 

“This will cause us to shutter some businesses . . . We have a few bad businesses that . . . we could be tolerant of as members of the family.  Somebody else would have already shut them down.  We got a few businesses, small ones, we won’t reopen when this is over.”

There are lessons in the views of Mr. Munger, who at 96 years old is one of America’s wealthiest people and no stranger to economic cycles.  Munger and Berkshire’s approach to investing is not unlike ours.  Here are a few time-tested Munger principles that we employ and that will help us get through this crisis:

“One of the greatest ways to avoid trouble is to keep it simple.” – Our investment process is highly transparent and quite simple.  We own a diversified basket of individual companies whose valuation was reasonable and whose cash flow was strong coming into this crisis.  We also work diligently to take a “safety first” approach with our fixed income investments.  Across asset classes, you can look at your statement and know what you own.  This transparency is highly unique in today’s world of financial planning.  It’s a great strength in crisis. 

“The big money is not in the buying and the selling, but in the waiting . . . It’s waiting that helps you as an investor, and a lot of people just can’t stand to wait ”  – As we have written throughout this crisis, there has never been a more important time – in the face of this wildly unique event – to be patient and wait out your investment strategy.  This is not a time to fall for the “Do Something Syndrome.” 

“Invert, always invert” – It is vital to look at problems in reverse to find the solution.  The question for this crisis isn’t what we should be doing, it’s what we shouldn’t be doing!

We pledge to you that we will continue to stick to our knitting and continue to fight the human temptation to make bad portfolio mistakes.  All the while, our relatively conservative and highly transparent investment strategy is of great advantage during times like these.